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Modigliani addresses deficit

Institute Professor Franco Modigliani, winner of the 1985 Nobel Prize in economics and a self-described "reasonable" economist, suggested last Wednesday that an immediate federal budget cut would be a preferable solution to the US federal buget deficit.

A budget cut would be preferable to an increase in taxes, Modigliani claimed, and an immediate budget reduction would be better than future cuts as proposed by the Gramm-Rudman legislation. Reducing government outlays means that the United States would not be spending more than it earns.

would also remove the burden from future generations.

Modigliani opened with a short review o recent economic history of the United States and his views on its economic policies, followed by commentary on the budget and the trade deficits, on inflation and the strength of the dollar on the foreign currency markets.

The enthusiastic 69-year-old professor explained to an almost full house the necessity of unemployment in slowing down inflation. "There are basically two ways to break the inflation spiral: reduce wages and produce a slow but more costly recovery, or a brute force increase in unemployment which is more painful but has a quicker and more energetic comeback."

Ths "brute force increase in unemployment" occurred during the first years of the Reagan administration to stop the inflationary effects that lingered from the oil crisis, he said. This was more effective and much less damaging than the price-fixing which occurred during the Nixon years, he explained.

One of Modigliani's proposals is to entice saving or spending by taxing consumption instead of income -- rather than using Individual Retirement Accounts and Keogh accounts which are but tax breaks, and thus better controlling the economy.

The existence of the debt is normal, he said; after every war, the United States has incurred a huge debt, which was paid after the war was over. The debt we currently face started with the Vietnam War.

That national debt would probably not be paid off in the near future, Modigliani said, but the "situation would probably improve." Interest rates will go down, the budget will be balanced, and the debt would begin to decline, he explained.

The dollar iscall Don about this overvalued slightly in the foreign currency markets, Modigliani said. The country should not be concerned, although this was due to a trade deficit. Most countries have a trade deficit, he explained. The combined surpluses of the nations that export more than they import is less than the total deficit of importing countries, he claimed.